Accommodation Costs - the new Formula

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28 October, 2020

The method of calculating the amount of compensation a claimant should be awarded for the extra accommodation costs associated with their injury has long been in contention between claimants and defendants. The difficulty arises when a claimant has a need for more expensive accommodation that can be adapted to their specific needs due to the injuries they have sustained. However as they will be left with an asset that has traditionally increased in value there needed to be a method of providing adequate compensation without giving them, or their estate in future, a windfall. The established methodology was set out in guidance produced by the case of Roberts v Johnstone back in 1989. But since it was based on the discount rate for future losses, the effect of the introduction of a negative discount rate in recent times was to reduce such claims to zero.

Last week the Court of Appeal heard the case of Swift v Carpenter. Mrs Swift has suffered serious leg injuries as a result of an accident. She was awarded over £4million, but this did not include anything for her extra accommodation needs as the lower courts said they were bound by Roberts v Johnstone. The Court of Appeal decided that Roberts v Johnstone should not be followed on the basis that it was guidance that was no longer appropriate in a time of negative discount rates as it resulted in considerable under compensation for claimants. They therefore had to decide what the right calculation should be to ensure a proper level of compensation but without a windfall to the claimant or their estate in future years. The Court of Appeal concluded that they should assess the difference in value between the claimants existing property and the new property needed to suit their post-accident needs, and then to apply to that a calculation based on the potential future market value of difference in cost (the reversionary interest). They decided that the fairest way to do that was to apply a discount factor of 5% to the claimant's life expectancy.

The formula to calculate this, until Ogden Table 35 is updated to provide us with a 5% discounting factor for terms certain, is as follows:

R = (NP - EP) x1.05-L

Where the following applies:

R = Reversionary Interest

NP = Value of New Property to be purchased for the Claimant's post-accident needs

EP = Value of Claimant's pre-existing property

L = Claimant life expectancy (see Forbes comment below as to how to calculate this until Table 35 is updated)

The R figure is then used to calculate the damages to be awarded as follows:

Damages = (NP - EP) - R

So in Mrs Swift's case where she had a property worth £1, 450, 000 and needed one worth £2,350,000, a difference of £900,000, and her life expectancy was 45.43 years derived from Ogden Table 2, the calculation was as follows:

R = (£2,350,000 - £1,450,000) x 1.05-L = £98,087

Damages = (£2,350,000 - £1,450,000) - £98,087 = £801,913

She was therefore awarded £801,913 against a full value of £900,000.

Forbes Comment

We understand that Ogden Table 35 is going to be updated to take account of the 5% discounting factor for terms certain which will make the calculation slightly easier. Until then the calculation requires a scientific calculator with an exponent function. On the iPhone for example one is provided in the built-in calculator if you turn the phone to landscape in the calculator app. To calculate 1.05-L you input 1.05 then press the xy button and type the life expectancy figure expressed as a negative (- 45.43 in Mrs Swift's case), then the = sign to get the result.

The Court of Appeal stated that they understood the need for clear guidance in such cases and yet they also left the door open for a different approach to be taken. They have accepted that the approach they suggest may not be the right one in all cases, but that it should be followed in cases with a long life expectancy as was the case for Mrs Swift, and where discount rates are negative or low as they currently are.

If faced with arguments that the approach should not be followed defendants need to be ready to counter such suggestions. The clear message from the Court of Appeal is that it will only be if the claimant is left in "substantial difficulties" as a result of this approach that the methodology should be departed from. And it is far from clear what "substantial difficulties" are nor what different approach should be used in any event.

In cases of very short life expectancy, which might leave a claimant with insufficient money to purchase suitable accommodation using this method, it might be possible to compensate them by paying for the rental costs of a suitable property for the rest of their life, for example.

It leaves open the question of whether we revert to a Roberts v Johnstone calculation if discount rates return to positive figures.

Whilst the case does leave some questions remaining, we do have guidance to follow in long life expectancy cases for now.

It should be noted that the Defendant has applied for permission to take the claim on appeal to the Supreme Court, and that decision was expected on the 23 October but as we go to press the outcome of the permission application has not been published, so watch this space.

For more information contact Siobhan Hardy in our Insurance department via email or phone on 0113 386 2686. Alternatively send any question through to Forbes Solicitors via our online Contact Form.

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